The most upgraded utility stocks, and why it matters

Key Points

• Utility stocks will be among the top earners in Q4 and are one of two sectors getting upward revisions for next year's earnings.
• Utility stocks pay above-average dividends, more than double the S&P 500. 
• The sector tends to trade with half the volatility of the S&P 500, and there is value to be found within in it. 

For two reasons, the Utility Sector NYSEARCA: XLU and Utility stocks should be on every investor's radar. The first is that the sector will produce the 2nd strongest YOY growth of any sector in Q4, and growth will continue at a near-double-digit pace in 2024. The 2nd, perhaps more important, is that the Utility Sector is 1 of only 2 sectors experiencing upward revisions to its outlook. That’s for Q4 and next year, which makes it stand out as an area of potential strength. 

Because the sector is also a high-yielding and low-beta sector, it has other attractions that make it a suitable holding for the next several quarters (and, generally, for the buy-and-hold investor types). The FOMC is on track to begin lowering interest rates in 2024, but there is lingering uncertainty and a high risk of market volatility. Even if the broad market eeks out a gain in 2024, the odds are high that it will move lower during the year, and the S&P 500 yields a lot less than the Utility Sector. 

Entergy is the most upgraded utility stock in December

Entergy NYSE: ETR is a mid-sized utility operating in the Texas/Louisiana region, producing solid cash flow. The renewable-tilted producer has had mixed analyst activity, but the balance is bullish and supportive of the market. Five of the eight revisions in the last 90 days are positive, including two Upgrades from Hold equivalents and five price target increases. The consensus implies a 10% upside and is moving higher after bottoming over the summer. 

Entergy recently made a deal to divest its natural gas distribution business. The deal will bring in nearly $0.50 billion to provide ample liquidity for reinvestment and capital returns. The stock yields about 4.45%, with shares trading near the five-month high and come with a low 0.65 beta. Trading at 15X this year and 14X next year’s consensus, it is one of the lower-valued utility stocks with a higher-than-average yield. 

Analysts shift gears with Xcel Energy 

Xcel Energy NASDAQ: XEL is the 2nd most upgraded Utility Stock, with four of the eight revisions issued in the last 90 days bullish. Those include an upgrade to Buy and four price target increases, with the consensus target stabilizing after a year of decline. The four price target reductions align with the consensus outlook of low to mid-single-digit gains for the stock price. 

The dividend is a little less than what you can get with ETR shares, about 3.4%, but the payout is equally reliable and comes with a growth outlook. Exel Energy has increased the distribution annually for 20 years and will likely extend the streak to 30. Trading at 18X is one of the higher-valued utility stocks, but that is offset by a lower-than-average beta of 0.5. 

The Southern Company trends north in Q4

The Southern Company NYSE: SO is the 3rd most upgraded utility stock, with four of eight revisions positive for the quarter. The four positive revisions include one upgrade, three boosted targets, and one initiated Buy rating with the highest target in the market. That target is $82 or more than 1000 basis points above the recent action. The target is the most recent and set by Citigroup. The Southern Company trades at 20X its earnings outlook, pays nearly 4% in yield with shares near $70 and has a beta of 0.55. 

Vistra Corp.: A hidden gem in the utility sector 

Vistra Corp. NYSE: VST isn’t the highest-yielding stock in the sector, but it could be one day. The company is aggressively growing and pays less than 20% of its earnings as dividends while trading at a significant discount to its peers. The company stock trades about 8X its earnings outlook, providing a pathway for capital appreciation that includes price-multiple expansion, dividend reinvestment and distribution growth. This stock is the 4th most upgraded but may as well be in the top spot. The three revisions on the radar are all bullish, and the consensus target is trending higher.